Non-mortgage banking companies in the U.S. that hold interest-rate-sensitive mortgage servicing rights (MSR) will soon get a “generous increase” in their capital positions thanks to a recent rise in interest rates, according to a report recently released by Moody’s Investors Service.
The report said the rise in the 10-year Treasury yield, which increased to approximately 2.55 percent to year end from 1.65 percent as of Q3 will result in mortgage companies reporting significant write-ups in their fair value MSRs for the fourth quarter of 2016. Fourth quarter earnings of US banks indicate a significant reversal of MSR fair value declines observed during the first nine months of 2016. Moody's expects significant MSR write-ups for some of the six public non-bank mortgage companies Moody's rates, reversing the declines in equity they incurred because of the MSR deterioration.
"The prolonged low interest rate environment has led to significant declines in MSRs, eroding the capital and profitability of US non-bank mortgage companies that hold MSRs, but relief is on the way," Gene Berman, Moody's AVP-Analyst said.
Of the six public mortgage companies Moody's rates, Nationstar Mortgage Holdings, Inc. (B2 stable) and Walter Investment Management Corp. (Caa1 negative) should benefit the most from interest rate increases. Both Nationstar and Walter experienced large material reductions of MSRs at 10 percent and 23 percent of fair value of their MSRs during the first nine months of 2016, owing to the significant decline in interest rates. Assuming the MSR reductions are reversed, the capital levels of Nationstar would both increase by 1.7 percent (TCE to TMA), or a respective increase of 20 percent and 170 percent in percentage terms.